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ETFs to Gain as U.S. New Home Sales Hit 14-Year High

Sweta Jaiswal, FRM
·5 mins read

The latest new home sales data is upbeat as sales of newly-built, single-family homes rose to the highest in August since September 2006 in the United States. Per the Commerce Department data, new home sales rose 4.8% in August to a seasonally adjusted annual rate of 1.011 million units. This compares favorably with July’s sales pace that was revised upward to 965,000 units from 901,000 units. Moreover, the metric has comfortably beat economists’ forecast of a 1% decline to a rate of 895,000-units, per a Reuters poll. Year over year, new home sales rose 43.2% in August from the year-ago estimate of 706,000. Notably, new home sales are considered a leading housing market indicator since they are counted at the signing of a contract, per a Reuters article.

New home sales, which make up for 14% of housing market sales, rose in the Northeast and South but declined in the Midwest and West. Notably, there was a 4.3% year-over-year decline in median new house price to $312,800 in August, per a Reuters article. Meanwhile, the number of new homes on market in August declined to 282,000 from 291,000 in July.

Housing Market: Bright Spot in U.S. Economy

The recently-released data on the U.S. builder confidence paints an upbeat picture of the U.S. housing market. Per the monthly National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes surged to an all-time high of 83 points in September compared with 78 points in August, 72 in July, 58 in June, 37 in May and 30 in April (the lowest since June 2012). Notably, the previous month’s reading was the highest in the 35-year long history of the index, matching the December 1998 record. Any reading above 50 is considered positive and signals at improving the sentiment. Notably, all three components of the index have gained.

Going on, sales of existing homes in August witnessed the strongest pace since the 2006-end. National Association of Realtors’ (“NAR”) data showed a 2.4% rise in the existing homes sales to a seasonally adjusted annual rate of 6 million units in August (marking three straight months of positive sales gains). Further, existing home sales rose 10.5% year over year.

Low interest rates are boosting demand in the housing market, increasing the number of mortgage applications. Analysts believe that support from the Federal Reserve is keeping the rates at such modest levels. The Fed in its commitment to drive economic recovery at the recently-concluded meeting decided to keep the interest rates at near-zero level.

The housing market is expected to also steadily benefit from changing demographical preferences of a large chunk of population, which is now looking for work-from-home-friendly properties.

Homebuilder ETFs Shining Bright

In such a scenario, here are a few housing ETFs that might gain from the improving housing sector scenario:

iShares U.S. Home Construction ETF ITB  

This fund provides exposure to the U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.31 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read: 4 Sector ETFs to Benefit From 3-Year Lower Rates).

SPDR S&P Homebuilders ETF XHB

A popular choice in the homebuilding space, XHB follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $1.31 billion. The fund charges 35 bps in annual fees and carries a Zacks ETF Rank of 3, with a High-risk outlook (read: all the Materials ETFs here).

Invesco Dynamic Building & Construction ETF PKB  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 31 stocks, each accounting for less than a 5.38% share. It amassed assets worth $126.2 million. The expense ratio is 0.60%. The fund is Zacks #3 Ranked, with a High-risk outlook.

Caveat

Meanwhile, rising lumber prices, which have skyrocketed more than 170% since mid-April, can slow down the housing market despite low interest rates. In this regard, Lawrence Yun, NAR’s chief economist, reportedly said that "over recent months, we have seen lumber prices surge dramatically. This has already led to an increase in the cost of multifamily housing and an even higher increase for single-family homes."

Also, low employment levels and an aggravating coronavirus outbreak may continue to impede the U.S. housing market momentum. Moreover, low inventories continue to be a concern as existing home listings are declining. In this regard, going by a Realtor.com report, there has been a decline of around 400,000 in homes that have been listed for sale since the pandemic has struck, according to a MarketWatch article. Thus, as a result of low interest rates, low inventories, high materials costs and accelerating demand, housing prices are rising which can make properties unaffordable for buyers.

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SPDR SP Homebuilders ETF (XHB): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
Invesco Dynamic Building Construction ETF (PKB): ETF Research Reports
 
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